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Network News • 06-08-2020

After bailing out the hospitality sector, should banks follow?

Author: George Mangion
Published on Business Today 6 August 2020

In a wave of bad reports on bank profit statements, one realises that the drop in profits caused by the COVID-19 pandemic encouraged overseas bank directors to trim their salaries/bonuses in sympathy with their suffering depositors.

In the first quarter of this year, HSBC’s chief executive said he would donate a quarter of his base salary, about £160,000, to charity for six months. He will also not take his annual cash bonus, which would have been as high as £1.2m. This gesture was copied by the CFO who is donating £93,000 and forgoing £706,000, while chairman Mark Tucker will donate his entire 2020 fee to charity, about £1.5m.

HSBC is not the only top global bank to show solidarity with the community. Its example is followed by other directors of major UK banks, including RBS and Lloyds, who agreed to give up their bonuses for this year. Due to the dire financial position of UK banks, the Bank of England recommended a restriction of bonuses during the pandemic. Why this sudden drop in profits by banks – a sector which perennially beats the trend and sails through any rough weather?

In the last 2007/8 financial crisis, many bankers were blamed for triggering the global recession due to light-touch regulation – particularly over risky investment banking adventures. Most global banks were bailed out by their respective governments as they were considered too big to fail. Financial stability was gradually restored at a heavy cost to taxpayers.

Barclays, the darling bank that sponsors the UK Premier football league, has taken a further £1.6 billion hit from the coronavirus crisis in the second quarter of the year. It posts a pre-tax profit of £1.27 billion in the first half of the financial year, down from £3 billion the year before. The badly bitten wolf has reported that the impairment charge will reach a little over £1.4 billion as the bank prepared for a slew of bad loans. As expected, it is citing the impact of coronavirus.

But how did the local banks fare? At this juncture, both BOV and HSBC in Malta reported disastrous results over the first six months of this year.

Not to worry, say the pundits as there is nothing fundamentally wrong in the prowess of management. All is well, they reply in unison, since one can really and truly conveniently blame COVID-19, for the shameful results.

Sadly, for the first six months of 2020, the Bank of Valletta Group is reporting a profit before tax of €13.8 million, a severe drop from the previous year when it posted a respectable €54.3 million. Employing thousands and having a substantial slice of the local business, BOV humbly reports that its annualised return on equity (pre-tax) is just 2.6%.

The acting chairman blamed COVID-19 and its gremlins for the disastrous show. The bank blames de-risking exercises which partly contributed to a drop in results. In the first place, commentators ask why the recent Brussels-led regulation of BOV resulted in such a costly pruning exercise. Apart from the coronavirus-induced business shrinkage, BOV has a number of skeletons in its cupboard.

One salubrious case is the trust it holds on behalf of the Deiulemar group – a defunct Italian shipping company. This group is claiming €363 million from BOV to which recently it pledged an out-of-court settlement of €50 million. This was rejected. The offer also comes two years after BOV appealed an Italian court’s order for a precautionary warrant that requested it to hive off €363 million, as a provision for damages requested by foreign bondholders. The Italian court in Torre d’Annunziata, a province of Naples, upheld the claim back in March 2018 after it was brought by liquidators of the Deiulemar group.

Yes, Malta had its fair share of bad apples and one cannot always blame the virus. No heads rolled but the MFSA is investing a cool €12 million and recruiting more experts to fine-tune its filtering prowess. The government is gung-ho that the final report by Moneyval over money laundering and terrorist financing shortfalls will see us sail through unscathed early next year.

Malta as a financial jurisdiction is to be saved the dreaded fate of becoming a greylisted domicile. The prime minister is hopeful that we shall be spared this poisoned chalice.

Back to the BOV, one is encouraged to hear the words of its newly appointed CEO, Rick Hunkin. This bank, with a majority investment by the state, reported that its pre-tax profit dropped by 75 per cent in the first six months of this year. Commenting on the results, Hunkin said: “In line with the rest of the world, these are trying times for Malta and for Bank of Valletta and we are rising to the occasion by supporting businesses, customers and the wider community”.

But wait a minute, who is to blame and bear the brunt of the shortfall? None other than the shareholders who for the fourth year will not receive a dividend. Take heart, because Hunkin assures us that BOV’s self-induced reforms will result in a more efficient, more digitally-focused and more customer-oriented bank.

Does this mean that in the past the bank was rather too generous in gauging its risk appetite? The CEO is assuring shareholders that the current de-risking programme is proceeding at an accelerated pace. This comes at a cost. Pruning dead trees from your garden means a lower harvest next time around. By the way, there was no appetite by management to donate part of their salaries to charity in recognition to the suffering caused to the community.

HSBC Malta said the economic impact of the COVID-19 pandemic has been the main driver of the change in financial performance in the first half of 2020. The bank (which locally closed nine branches and internationally seeks to lay off 35,000 workers) issued the following data: Profit before tax down €19.1m to €1.8m due to higher than expected credit losses and lower revenue reflecting the impact of the COVID-19 outbreak.

It comes as a stark pointer that during the first six months, lending increased by a mere 1% and deposits grew by just 3%. The sad news for shareholders is that the profit of €1.2m resulted in earnings per share of a miserable 0.3 cents compared with 3.8 cents in the same period in 2019.

Does this mean that banks need a bailout to help them sharpen a blunted profit edge and to reinvigorate management to think outside the box at a time when most borrowers complain about the risk-averse attitude of banks? Needless to say, the generous collateral afforded by Malta Development Bank (a state-owned credit institution) to all local banks should in theory lead to expanded lending – not the reverse. So what went wrong?

We’re now seeing, for example, unprecedented levels of government support for a Keynesian intervention into the economy (such as wage supplements, free cash vouchers, and extensive road repairs). If this medicine works, party apologists predict that the patient may soon be up and running (provided a second lockdown is avoided).

One hopes that sanity prevails and a branch and root reform are undertaken in local banks to help them seek new opportunities for growth among the cash strapped local business community.

Author: George Mangion
Published on Business Today 6 August 2020
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